Housing Affordability in October Sinks to its Lowest Level Since 2008

First American Financial Corporation, the Santa Ana, California based, provider of title insurance and settlement services for real estate transaction recently released (12-27-21), their First American Real Estate House Price Index (RHPI) for October 2021. The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state, and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

According to Mark Fleming, First American’s chief economist, “Affordability sank to its lowest level since 2008 in October, as two of the three key drivers of the Real House Price Index (RHPI) swung in favor of reduced affordability relative to one year ago. Higher mortgage rates and record year-over-year nominal house price growth triggered a nearly 20 percent jump in the RHPI (rising RHPI values indicate declining affordability). The soaring nominal house prices and uptick in mortgage rates swamped any affordability gains from the 3.6 percent yearly increase in household income. Since we know real estate is local, house-buying power and nominal house price gains vary by city, begging the question, where is affordability declining the most?”

In regard to 2022, Fleming added, “If affordability falls too far, some home buyers on the margin will pull back, prompting fewer bidding wars and causing house prices to moderate. In the near term, a labor market characterized by high demand, but limited supply means upward pressure on wages as employers compete to attract employees. While mortgage rates are expected to increase in 2022 as the economic recovery continues, consensus expectations still put them below 4 percent.”

Fleming concludes that, “For some home buyers, as the ‘big short’ in housing supply continues, it will become impossible to keep up with double-digit nominal house price growth, especially in a rising-rate environment. The challenge for home buyers in 2022 will mirror 2020 and 2021 – you can’t buy what’s not for sale even if you can afford to.”